This is the latest contribution to “Better Britain: What do we want for our country?” – the Reaction series aimed at generating a positive debate on the UK’s future.
Why has Britain de-industrialised so much more than any of our main competitors?
We’re often told that the decline of manufacturing is a global phenomenon. That it’s inevitable and happening right across the west. That job losses in the 70s and 80s were for the best: a process of shaking out old, hopelessly uncompetitive firms.
But that’s not quite right.
Since 1990 – in other words, long after any Thatcher-era shakeout – the UK has seen manufacturing’s share of the economy shrink faster than in any other G20 country.
The data shows we have deindustrialised to an abnormal degree compared to our peers in the G7. What’s going on?
Initially, the shakeout of unproductive manufacturing in the late 1970s and early 1980s probably did reflect real market forces, and particularly politician’s mistakes in the 1960s and 70s. Remember the Austin Allegro, a product of Britain’s then uncompetitive car industry?
But the decline of industry in the UK may now partly be the result of policy-imposed distortions caused by the UK’s extremely hostile tax treatment of capital investment.
Britain’s tax treatment of investment is the least generous of any G20 country, which helps explain why investment and productivity in Britain are so much lower than its competitors.
It might also explain why manufacturing has shrunk so much more in the UK: manufacturing requires about twice as much capital equipment per worker as the rest of the economy, so our tax treatment of investment is particularly bad for manufacturing.
Why should we care?
First, a tax system hostile to investment reduces investment and productivity right across the economy whether firms are making software or soft furnishings.
Fixed investment in Britain has been lower than the OECD average in every year but one since 1960.
No wonder productivity is nearly a third lower here than in countries such as the United States. No wonder we are being overtaken by rising countries such as South Korea, which has nine times more robots per manufacturing worker than the UK. Lower investment means lower productivity which ultimately means wages are held back.
Second, deindustrialisation is bad news because productivity growth in manufacturing is so much higher than most of the rest of the economy. If you go to a hairdresser or a restaurant, they are doing pretty much exactly what they did 40 years ago. There’s just not that much scope to do things more efficiently.
In contrast, in manufacturing you can constantly upgrade machinery, use new techniques and materials. Things often improve imperceptibly: a fizzy drinks can has 40% less metal in it today than 25 years ago, due to better design and production.
That’s why manufacturing accounted for around a quarter of productivity growth nationally since 1997. In some parts of the country that share was much higher. Manufacturing provided 40-50% of productivity growth in poorer regions like Wales, the West Midlands and North West.
That’s means there’s a double hit from a tax system hostile to investment. It is particularly bad for poorer regions, which are more reliant on manufacturing.
We’ve been arguing about under-investment in Britain for decades. In a new report for the think tank Onward published today I propose radical action to fix the problem, by dramatically cutting the tax on investment.
That means increasing capital allowances (which let firms offset investment against tax) by 50% and introducing new allowances for types of investment that aren’t covered today. It’s something numerous business groups and the LSE Growth Commission have argued for.
I argue we should go even further in cutting tax on investment in poorer regions, to attract inward investment there.
We know just growing the public sector doesn’t work. Labour tried that and the cities around the world that have really turned themselves around have done so by attracting high-skilled private inward investment.
Sometimes we have done that here too. For example, we should learn from the way that Mrs Thatcher used investment tax breaks to lure Nissan to invest in Sunderland, transforming wages in the area.
For decades successive British governments have worried about underinvestment, and talked about rebalancing the economy. Since the referendum, that questions has come into sharper focus than ever, given the concentration of the leave vote in struggling areas.
Now it’s time to take action. This Autumn’s Spending Review will be the first under the Conservatives not to be dominated by emergency deficit reduction, with debt as a share of GDP set to fall from 83 to 73% GDP over the next five years.
We have the space and fiscal firepower to take action to tackle the deep-seated problems in the British economy and put rocket boosters under poorer areas. What better way could there be for a new Prime Minister to signal a new era?
